Constructive Termination Claims Under the New Jersey Franchise Practices Act Generally Require That the Franchisee No Longer Operate the Franchise

The New Jersey Franchise Practices Act ("NJFPA" or "Act"), a remedial statute regulating franchise relationships, generally prohibits franchisors from terminating a franchise "directly or indirectly" without advance written notice and "good cause" for termination. N.J. Stat. § 56:10-5. "Good cause" is defined as "failure by the franchisee to substantially comply with those requirements imposed upon him by the franchise." Id. New Jersey courts have recognized a claim for constructive termination under the NJFPA, which typically arises when a franchisor makes a franchisee's working conditions so intolerable that the franchisee is forced to resign voluntarily. The question of whether a franchisee can assert a viable constructive termination claim under the Act without abandoning its franchise was recently decided by the U.S. District Court for the District of New Jersey in Pai v. DRX Urgent Care, LLC, Nos. 13-4333 and 13-3558, 2014 U.S. Dist. Lexis 27071 (D.N.J. Mar. 4, 2014). In Pai, the district court held that a constructive termination claim pursuant to the Act is barred when a franchisee is still operating the franchise and the franchisor is not attempting to force the franchisee to resign in any way.

The Parties and the Franchise Agreements

Plaintiffs NEXDRX1 LLC and Laura Fabbro (collectively, "Franchisees") each executed the same form of "Doctors Express" franchise agreement, pursuant to which the Franchisees were each obligated to operate an urgent care facility at a New Jersey location using the Doctors Express marks, system and operations manuals for 15-year terms. Ownership of the Doctors Express franchise system changed several times during the Franchisees' terms. American Family Care ("AFC"), whose subsidiary bought the franchise's assets from the prior franchisor, DRX Urgent Care LLC ("DRX"), is the current franchisor. After operating the franchises for several years, the Franchisees initiated separate lawsuits by filing nearly identical complaints asserting various tort and contract claims, including claims for constructive termination, against their current and prior franchisors, AFC and DRX (together, the "Franchisors"), respectively.1 The Franchisors filed motions to dismiss the complaints in both cases based on the same legal theories, which the district court addressed simultaneously.

The Constructive Termination Claim

The Franchisees alleged that the Franchisors constructively terminated their franchises in violation of Section 5 of the NJFPA by, among other things, hiring a chief executive officer at a time when he was implicated in a federal investigation relating to another urgent care provider and making financial misrepresentations in the Franchise Disclosure Documents. The district court dismissed the Franchisees' constructive termination claims, holding that they failed to properly allege the necessary factual foundation for such claims. The district court found that the dispositive facts requiring dismissal were that the Franchisees continued to operate the franchises and that neither Franchisor had taken any steps toward terminating the Franchisees.

The district court's decision relied heavily on Mac's Shell Serv., Inc. v. Shell Oil Prods. Co. LLC, 559 U.S. 175 (2010), where the U.S. Supreme Court dealt with a constructive termination claim brought pursuant to the Petroleum Marketing Practices Act ("PMPA"), a federal statute that protects gas station franchises. There, the Supreme Court reversed the U.S. Court of Appeals for the First Circuit's prior decision and held that if the PMPA created a claim for constructive termination, such a claim would require that the franchisor's alleged bad acts force a franchisee to actually abandon the franchise. The Supreme Court found the following three considerations significant: (1) the ordinary meaning of the word "terminate," (2) the established meaning of the word "terminate" under other statutes, and (3) the general understanding of the doctrine of constructive termination in other contexts, including employment law. Here, the district court dismissed the Franchisees' argument that Mac's Shell is limited to PMPA claims and cited to a federal case where Mac's Shell was applied to a state franchise relationship statute similar to the NJFPA. See Bell v. Bimbo Foods Bakeries Distrib., No. 11-03343, 2012 U.S. Dist. Lexis 90987 (N.D. Ill. July 2, 2012) (dismissing constructive termination claim under the Illinois Franchise Disclosure Act when distributorship was ongoing).

Additionally, the Franchisees insisted that Maintainco, Inc. v. Mitsubishi Caterpillar Forklift America, Inc., 408 N.J. Super. 461 (App. Div. 2009), a New Jersey appellate decision issued before Mac's Shell, held that constructive termination claims can stand under the NJFPA even if the franchise is still operating. Indeed, the Maintainco court expressly rejected the notion that "if [a] plaintiff wanted to claim damages under the Act for termination it was required to withdraw from the agreement and thus allow itself to be 'terminated.'" Maintainco, 408 N.J. Super. at 478-79. The district court found the Franchisees' interpretation of Maintainco unpersuasive, stating that while that decision allowed for constructive termination claims under the NJFPA, the Appellate Division made clear that such claims must be construed in accordance with standard contract law and derived its definition of "constructive termination" from employment cases in which employees usually left their jobs voluntarily. Pai, 2014 U.S. Dist. Lexis at *23. Further, the district court found that the constructive termination claim in Maintainco was viable only because the franchisee was "essentially no longer able to operate the franchise," as evidenced by the fact that the franchisor sent a termination letter to the franchisee and was actively working to force the franchisee to resign. Id. at *24-25. Absent the type of circumstances present in the Maintainco case, the district court held that "a claim for constructive termination requires that a franchisee no longer be operating." Id. at *25-26.

Conclusion

The application of Mac's Shell to the NJFPA in this opinion is notable because it has significantly limited the reach of constructive termination claims, leaving franchisees to pursue state law breach of contract remedies for relief from franchisor conduct that does not bring or attempt to bring about the end of the franchise relationship.

Paul Halasz wrote an article, "Ascertaining When a Dealership or Distributorship is Subject to the NJFPA," forNew Jersey Lawyer Magazine. The article is about whether a relationship between a supplier and its distributors is subject to the dictates of the New Jersey Franchise Practices Act, and how these arrangements could be critical to an enterprise facing major business challenges.

Stamford, Conn., August 24, 2015 - Day Pitney is pleased to announce that 68 attorneys have been selected for inclusion in the 2016 Best Lawyers in America. Best Lawyers ranks lawyers through peer-review surveys, and has been published annually since 1983.

Paul Halasz and Namita Shah were quoted in the article, "What You Need To Know As A Summer Associate," in Law360. They offered summer associates advice such as exploring different practice areas, networking and to treat each assignment as though it was work for a client.